CCT update 22nd May 2009

What are rights issues?
Under a secondary market offering or seasoned equity offering of shares to raise money, a company can opt for a rights issue to raise capital. The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A rights issue is offered to all existing shareholders individually and may be rejected, accepted in full or accepted in part. Rights are often transferable, allowing the holder to sell them on the open market.
To issue rights the financial manager has to consider:
Subscription price per new share
Number of new shares to be sold
The value of rights
The effect of rights on the value of the current share
The effect of rights to existing and new shareholders
A right to a share is generally issued on a ratio basis (e.g. one-for-three rights issue). Because the company receives shareholders' money in exchange for shares, a rights issue is a source of capital.
Rights issues may be underwritten. The role of the underwriter is to guarantee that the funds sought by the company will be raised. The agreement between the underwriter and the company is set out in a formal underwriting agreement. Typical terms of an underwriting require the underwriter to subscribe for any shares offered but not taken up by shareholders. The underwriting agreement will normally enable the underwriter to terminate its obligations in defined circumstances. A sub-underwriter in turn sub-underwrites some or all of the obligations of the main underwriter; the underwriter passes its risk to the sub-underwriter by requiring the sub-underwriter to subscribe for or purchase a portion of the shares for which the underwriter is obliged to subscribe in the event of a shortfall. Underwriters and sub-underwriters may be financial institutions, stock-brokers, major shareholders of the company or other related or unrelated parties. The Panel’s guidance covers both non-underwritten and underwritten rights issues.

Basic example
An investor: Mr. A had 100 shares of company X at a total investment of $40,000, assuming he purchased the shares at $400 per share.
Assuming a 1:1 rights issue at an offer price of $200, Mr. A will have the option to subscribe to additional 100 shares of the company at the offer price. Now, if he exercises his option, he would have to pay an additional $20,000 in order to acquire the shares, thus effectively bringing his average cost of acquisition for the 200 shares to $300 per share ((40,000+20,000)/200=300). Although the price on the stock markets should reflect a new price of $300 (see below), the investor is actually not making any profit nor any loss.

What this means is that you have been “forced” to pump in more of your money just to maintain your ownership of the company.

The company: Company X has 100 million outstanding shares. The share price currently quoted on the stock exchanges is $400 thus the market capitalization of the stock would be $40 billion (outstanding shares times share price).
If all the shareholders of the company choose to exercise their stock option, the company's outstanding shares would increase to 200 million. The market capitalization of the stock would increase to $60 billion (previous market capitalization + cash received from owners of rights converting their rights to shares), implying a share price of $300 ($60 billion / 200 million shares). If the company were to do nothing with the raised money, its Earnings per share (EPS) would be reduced by half. However, if the equity raised by the company is reinvested (e.g. to acquire another company), the EPS may be impacted depending upon the outcome of the reinvestment.

CCT ISSUES RIGHTS
CapitaCommercial Trust (C61U.SG) said Friday that it will offer 1.4 billion units under a rights issue to raise about S$828.3 million. The trust will offer one rights unit for every existing unit at S$0.59 each, it said in a statement. Units of CapitaCommercial closed Thursday at S$1.06 each. Proceeds will be used to reduce borrowings, and for general corporate and working capital purposes. CapitaCommercial is managed by CapitaCommercial Trust Management Ltd., which is an indirect wholly owned unit of CapitaLand Ltd. (C31.SG). The rights issue is fully underwritten. DBS Bank Ltd., Cazenove & Co. (Singapore) Pte. Ltd. and United Overseas Bank Ltd. are the joint lead managers and underwriters, the trust said.

The reasons for doing so is to reduce their gearing, improve financial flexibility by boosting its balance sheet and improving its credit profile. According to Daiwa Institute of Research, CCT is building up capacity to refinance debt and creating a buffer against potential asset write-downs. What this simply means, is that CCT’s assets (their buildings) are falling in value and are raising more capital in order to build more confidence with their existing or future lenders and to prevent early redemption of loans for etc their $885million due next year in 2010.

WHAT TO DO NOW?
Basically there are only three decisions for the unit holder to decide. Either..

1)Activate your rights issue

2)Sell your rights issue.

3)Sell everything.

Do give me the opportunity to explain the process of each decision in detail to the best of my knowledge :)

Take for example you bought CCT at 0.70 per share in march 2009, say you bought 10 lots, spends a total of $7000 barring out all commission and extra transaction cost to make things simple. So, initially your expected yield from CCT for FY 2009 is $1200 which is 17.1%

Now, if you choose decision 1) which is to activate your rights issue, you have to spend another (0.59*10,000)= $5,900. The rights issue share price of 0.59 represents a 44% discount to the stock’s last traded price of $1.06
And a discount of 61% discount to their new estimated calculated NAV figure of $1.51 after taking into account the revaluation and completion of the rights.

Therefore in total you spent $12,900 in order to maintain both your expected yield % for FY 2009 which is $1200 and margin of safety to NAV. And if you have noticed, the % yield has dropped from 17.1% to a mere 9% , this is because i did not factor in any positive effect coming from the extra capital that will help CCT this year or in the future, just to be conservative. Therefore the downside here is, the opportunity cost , what you can do with the $5,900 if you didn't put it into the rights?

Ok, now.. if you choose decision 2) which is to sell your rights issue, then you need not spend $5,900 and he initially get the extra profit if he sells his right at $1.06? WRONG! The stock market will not be soo stupid to maintain the share price of CCT at $1.06, my good guess is that the market will pressure the share price of CCT to about $0.80-0.91 at best. So, if we assume that the share price of CCT after their trading halt is lifted at $0.80, the profit made from selling his rights would probably amount to ($0.80-$0.59= $0.21*10,000 = $2,100). Looks like a good decision to make right? Can save the extra $5,900 plus get another extra $2,100 from selling his rights. However... if he decides to sell, he compromises his dividend yield for FY 2009 and the future years for holding CCT. His expected dividend yield will fall 50% from getting $1200 to getting only $600 for FY 2009 and for the rest of the years. Your margin of safty from NAV was intially 75%, will drop to 53% , this then is evident of dilution.

Finally, if you choose decision 3) which is to sell everything, you probably earned, assuming share price of CCT is 0.80 after trading halt , [(0.10*10,000)+(0.21*10,000)]= $3,100 , you get back roughly $3,100 in pure profits and no worries of any exposure to things related to CCT. CCT also will have no worry to you dividends for the future years to come. All is settled,closed and silent

To decide which decision creates more value for the holder, it has to be determined by the investor him or herself. It all boils down to whether you still have confidence in CCT's growth and business model and assets.

As for me, lets look at the reasons why i bought CCT in the first place.

1) Want to gain exposure to Singapore’s rental of Office buildings, mainly banking, insurance and financial sector. In addition, a bit of Malaysia’s rental business
2) This Trust has formidable reputation with strong backing from parent company CapitaLand
3) This enables the trust to easily obtain loans, like the recent $580million using one building as collateral. Refinancing in this credit crunch environment is supposedly not a problem.
4) Past performance reviews consistent increase in revenue/profit margin and operational cash flow. Note that these are bull years, might be misleading.

5) It is also known that the trust builds good relationships with their clients

6) Their clients’ a.k.a tenants are well known and respected, like GIC, Starhub, JP Morgon, Standard Charted Bank (Big client with 15.2%)

7) Potential Upside in the future, involves increasing of rent rates (cause theirs is low as compared to market rates $7.18 vs. $11.40 psf), growth in further acquisitions in the future via Asia or mainly Malaysia.

Soo, since they issues the rights at 0.59 per share..should i choice 1)? 2)? 3)? Hahah :]